Working Paper: NBER ID: w20758
Authors: Martin Goetz; Luc Laeven; Ross Levine
Abstract: We develop a new identification strategy to evaluate the impact of the geographic expansion of bank holding company (BHC) assets across U.S. metropolitan statistical areas (MSAs) on BHC risk. We find that the geographic expansion of bank assets reduces risk. Moreover, geographic expansion reduces risk more when BHCs expand into economically dissimilar MSAs, i.e., MSAs with different industrial structures and business cycles. We do not find that geographic diversification improves loan quality. Our results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that geographic expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.
Keywords: bank risk; geographic expansion; bank holding companies; instrumental variable strategy
JEL Codes: G11; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Geographic expansion of bank holding company (BHC) assets (F65) | BHC risk (I12) |
| Geographic expansion into economically dissimilar MSAs (R12) | BHC risk (I12) |
| Geographic expansion of bank holding company (BHC) assets (F65) | Idiosyncratic local risks (D81) |
| Geographic expansion of bank holding company (BHC) assets (F65) | Loan quality (G51) |